Mortgage Rates Daily Commentary

The truth about house prices

Latest housing stats are being released at the moment. This stat from QV yesterday sums up why there is so much angst in Auckland. New Zealand house prices are 2.3% higher than they were at the peak of the last property cycle, yet Auckland prices are 23% higher than the previous peak. Full story here

Floating rates sink while fixed rates rise

Although central banks both
overseas and in New Zealand are cutting interest rates and floating
mortgage rates are also coming down, fixed-term mortgage rates
have begun rising again.

Friday, April 27th 2001, 3:42PM

by Jenny Ruth

Although central banks both
overseas and in New Zealand are cutting interest rates and floating
mortgage rates are also coming down, fixed-term mortgage rates
have begun rising again.

WestpacTrust, for instance,
cut its floating home loan interest rate last week from 8.25%
to 7.95% immediately after the Reserve Bank of New Zealand cut
its official cash rate from 6.25% to 6%.

But the same day, the bank
raised its two to five-year fixed rates by between 20 and 30 basis
points. The three-year rate rose from 7.1% to 7.4% and the five-year
fixed rate rose from 7.4% to 7.6%.

Adrian Orr, chief economist
at WestpacTrust, explains that while the Reserve Bank controls
New Zealand's short-term interest rates, long-term rates depend
on what's happening to world interest rates, most importantly
those in the US.

US Treasury bond yields
have started rising in recent weeks and New Zealand government
bond yields have followed suit. The November 2011 bond, for example,
has risen from as low as 5.83% on 19 March and was trading this
afternoon at 6.43%.

That's much higher than
the equivalent US Treasury bonds which are currently trading at
5.19%. `We're all accessing the same pool of international capital
and there's a certain food chain as to who gets to drink first
and at what price,' Orr says.

That's called a country's
risk premium and New Zealand, being a small and internationally
vulnerable country, has a premium of between 80 and 120 basis
points above US yields.

US yields have been rising
even though the Federal Reserve in the US has been cutting rates
much more aggressively than New Zealand's central bank. While
both banks began this year with their benchmark rates at 6.5%,
the Fed 's federal funds rate is now down at 4.5%.

That's because the Fed wants
to stimulate the sluggish US economy. Our central bank is faced
with a reasonably buoyant economy but the slowdowns in the US
and Australian economies, our major trading partners, threaten
the longer-term growth outlook.

`Financial markets are considering
that the end of the monetary policy cycle in the US isn't too
far away,' Orr says. The markets expect the Fed may cut its rate
to 4%, but it won't go much lower than that.

If the Fed's rate cuts produce
the desired result and US growth picks up, `by the end of next
year, we may be in a rising US interest rate environment,' Orr
says.